PENN Entertainment, Inc. (PENN) Q4 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Penn National Gaming Fourth Quarter Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, February 2, 2016. I would now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead sir.

Thank you, Nelson. Good morning, and thank you for joining Penn National Gaming's 2016 fourth quarter conference call. We'll get to management's presentation and comments momentarily, as well as your questions-and-answers, but first I'll review the Safe Harbor disclosure. In addition to historical facts or statements of current condition, today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risk and uncertainties. These statements can be identified by the use of forward-looking terminology such as expects, believes, estimates, projects, intends, plans, seeks, may, will, should, or anticipates, or the negative or other variations of these or similar words, or by discussions of future events, strategies, or risks and uncertainties, including future plans, strategies, performance, developments, acquisitions, capital expenditures and operating results. Such forward-looking statements reflect the Company's current expectations and beliefs but are not guarantees of future performance. As such, actual results may vary materially from expectation. The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the Company's filings with the Securities and Exchange Commission, including the Company's reports on Form 10-K and 10-Q. Penn National assumes no obligation to publicly update or revise any forward-looking statements. Today's call and webcast will also include non-GAAP financial measures within the meaning of SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP, can be found in today's press release, as well as on the Company's website. Having read that as quickly as possible, I'll now turn the call over to the Company's CEO, Tim Wilmott. Tim?

Thank you, Joe, and good morning everyone to PENNs fourth quarter and year end 2016 conference call. Joining me today on Groundhog Day in Pennsylvania is Chris Sheffield our Head of Penn Interactive Ventures, Eric Schippers, our Senior Vice President of Public Affairs; General Counsel, Carl Sottosanti; our Corporate Vice President of Finance, Justin Sebastiano; our CFO, BJ Fair and our Chief Operating Officer, Jay Snowden. First, I would like to begin my comments by talking about the Slide B, on the fourth quarter in terms of EBITDA guidance. Fairly flat overall revenue environment, we continue to show improving margins in that environment which speaks to our skills as operators to deliver the bottom line results in this case where the top line didn’t quite materialize. As we also closed 2016, we continue to diversify our earning story. We are making very good progress in integrating Rocket into our PENN Interactive Ventures business. And we continue to grow and integrate new VGT operators in Illinois under the banner of Prairie State Gaming. We did two small deals in the fourth quarter that closed. I would like to next touch on, in the fourth quarter we refinanced part of our Jamul loan and received about $270 million of proceeds, that allowed us to continue to de-lever. We started 2016 including rent at a leverage level about 6.6, we ended 2016 at about 5.8. So we continue to de-lever our balance sheet as we have communicated out in previous calls. On October 10, we opened up Jamul and had a very strong start in the first month, unfortunately business volumes have fallen since that opening and in our guidance for 2017 we're assuming no fees from Jamul operation from us being the manager there and we expect all our part of the loans that we have still out there will be subordinated when that time comes. Jay Snowden will provide more color on what we're seeing in San Diego County, when I turn the call over to him later. Moving over to Las Vegas, at Tropicana, we continue to make good progress on the improvements we've made in operation, on the casino floor and in the restaurant area. We still expect the completion of our $40 million phase one, capital improvement program to finish up in the third quarter of this year with the opening of Chef Robert Irvine's new restaurant and other improvements to our food and beverage operations. The design work on our master plan at Tropicana continues, but we’ve made the decision to take a look at how effective coming online in the third quarter is with our customer there and we're going to push out our incremental master plan spend out from 2017 into 2018, to give us more time to digest all the new offerings that are coming online this year. We also now have about two months of results of the impact on national harbor on our Hollywood Charles Town facility in Eastern West Virginia. Jay's going to provide more color on that, but certainly now seeing those results it's given us a level of encouragement that we were within the guidance we though, within the ranges that we've previously provided on the impact of national harbor on Charles Town. I'm also pleased to report in January, we completed refinancing of our capital structure, which BJ is going to go into more detail on and we also reported in our earnings today that we got Board authorization to repurchase up to a $100 million of PENN share over a two-year period. The management believes that's the best use of our capital and the source of those funds will come from operations. So there is a lot, obviously, here to digest. Lot of new information and at this time we always provide guidance for 2017. So what I would like to do now is turn the call over to BJ, to talk about the capital refinancing and the share repurchase, then we'll go to Jay to provide a little bit more color on to the operations and then we'll come back to BJ, to provide some more detail around our 2017 guidance. BJ?

Thanks, Tim. There's two significant items, I just wanted to provide some greater specificity about which Tim just mentioned. The first is the refinancing. As I'm sure you know that we announced in mid-January that we finalized the completely financing of our capital structure. Our previous credit facility was coming due in 2018, and we wanted to take advantage of the favorable market conditions that were out there. We knew that there was a favorable rate environment we wanted to capitalize on. We wanted to extend and stager the maturity of our different debt instruments. And we wanted to create flexibility in our capital structure to further de-lever and be positioned to take advantage of the accretive acquisitions and/or opportunities that faced us. So we were very pleased with the outcome. As we went to the market, we were able to complete a new senior secured credit facility, that was mainly comprised of a new $700 million revolving credit facility during 2022. Also, a $300 million Term Loan A facility, also during 2022, so they're both five year facilities. We supplemented that with a $500 million Term Loan B facility, doing seven years at LIBOR plus 250. We were very pleased that we were able to basically provide the same spread as we had on our previous Term B Loan, increasing the size and the timeframe that we had issued as well. We were also very, very pleased with a new issuance of $400 million senior unsecured notes offering. We were able to grow out on a ten-year maturity at 5.625% coupon, which basically was able to extend the maturity to ten years, but also ended up getting a 25 basis points reduction based upon our current note offering that we had outside. We replaced with that offering the $300 million notes and senior unsecured notes due in 2021, and we redeemed approximately $149 million of those notes just under 50% through our tender offer, remainder will be redeemed at the expiration of our call notice which will expire on February 6th. With the refinancing we are very pleased not only with support received from our strong banking relationships, but the level of the quality new investors they came into the credit of our company. We value those relationships very much and maintain our focus on financial strength liquidity and strong free cash flow generation in the company. Switching now to the share re-purchases that Tim had just mentioned that we just recently authorized by the Board, just to provide a little historical on context, PENN actually has been active in the re-purchase of shares when we believe the market conditions were appropriate. In 2008 we invested $152 million to re-purchase over 2.9 [ph] million shares. And in 2010 and '11 we re-purchased over 4.4 million shares for another $141 million. And in 2013 as part of the REIT transaction we reduced the total diluted number of PENN shares by over 13 million through the buybacks and exchanges of the preferred shares. So in each case, we were -- the company was able to take advantage of the attractive valuations that we thought the stock was at that time. And we ultimately delivered returns to the shareholders, but we did not impact the growth of the company and the growth opportunities of the company. As we look at the current conditions, and the recent transaction that the Board has just authorized new plan. The specific of the plan as Tim alluded to were, we have authorization of $100 million of total potential re-purchase. The authorization is valid for a two-year period. Purchases will be on open market purchases instructed by management and not part of a 10B share purchase program at this time. And the purchases we've made from operating cash flow from the company. So management is very confident that there was strong free cash flow generation that the company will be generating in the future years, that we can achieve our mutual objectives of continuing to de-lever the company, but also execute against this re-purchase program and also be in the position to take advantage of the attractive growth opportunities that we may have come before us.

Thanks BJ. Jay?

Thanks Tim, good morning everyone. Our fourth quarter EBITDA exceeded guidance due to strength in Missouri, Massachusetts, Las Vegas, Prairie State Gaming along with prudent expense management at corporate, partially offset by unrated softness and markets where we've seen softness in the last couple of quarters, but lots is Biloxi Mississippi, New Mexico and then specific to the fourth quarter in December Charles Town. Highlighting a few of our key markets. In Las Vegas, we finished the quarter and the year with record EBITDA and EBITDA margins with M Resort. We also concluded 2016 with Tropicana having generated double digit EBITDA, a property that was barely profitable when we started our acquisition diligence at the beginning of 2015. Moving to West Virginia, while it is still early, we are indeed encouraged, as Tim mentioned, by the first 50 plus days, post MGMs, opening of national harbor on December 8th. Even when adjusting for whether our business to date has been impacted less than initially forecasted. In the month of January, our spot volumes exceeded prior year on 20 of 31 days. So we remain cautiously optimistic, but want to stress again that it is still in the very early innings in West Virginia. In Metatheses, we continue to show positive revenue and EBITDA momentum as we closed down 2016, Plainridge Park Casino's EBITDA margins improve nearly 500 basis points year-over-year in the fourth quarter. Moving on to San Diego, after what was a very successful opening month in October, casino volumes fell off greater than anticipated in November and December in the face of extremely aggressive marketing and customer reinvestment levels from the nearby competition. We continue to make real time adjustments to our marketing strategy and are encouraged by weekend volumes in January, which were up on average over 20% from the weekend volumes in November and December. The property continues to generate meaningful cash flow every month and we remain very optimistic above the overall prospects as we continue to make refinements to our operating and marketing practices in order to maximize revenues and flow through for the reminder of '17 and beyond. At the macro level, overall economic indicators including employment and consumer confidence remains strong as we start the new year, though we've not yet observed any material change, consumer spend or behavior since the election. January weather for the most part has been mild across our key markets year-over-year and we're off to a really good start here in 2017. So with that I'll turn it back over to BJ, to walk you through '17 guidance.

Thanks, Jay. On our 2017 financial guidance, the detailed assumptions, underlying guidance we've laid out on Page 5 of the press release. I'll just hit a couple of the highlights here for the full year, our revenue estimates are 3.0469 billion, Q1 would be 761 million total revenue. On EBITDA for the full year, 840 million. In Q1 expected to be 209.3 million. Cash on-hand at 12/31/16 is $229.5 million. We anticipate that all of our debt covenants will be comfortably met and maintenance CapEx is expected to be $78 million for the year and 26.4 of that occurring -- expected to occur in Q1. Project CapEx is expected to be $26 million for the year, 8.6 million of that is expected to be in Q1 and that reflects, as Tim mentioned, the shift of the 2017 expected Tropicana expansion into 2018. For cash taxes, we expect to end up with a net refund of $40.6 million and the cash generated prior to mandatory payments were project CapEx is expected to be at 196.5 million for the year. With that, I'll now turn it back.

Thanks BJ. Operator, we are now ready to take any questions from the audience.

[Operator Instructions]. Our first question comes from the line of Carlo Santarelli with Deutsche Bank. Please proceed.

If you, and you might have just said it, but I think the phone cut out a little bit. When I just look at your gross free cash flow before the modest $26 million of project CapEx for next year, it looks like close to $290 million with the cash tax refund. As you think about the buyback program, coupled with other tuck-in acquisitions and debt paydown, in an ideal scenario, how do you think about the distribution between those buckets of that incremental free cash?

I am sorry Carlo the last question was?

How do you think about the distribution between those buckets of that free cash flow number?

We don’t think about that Carlo in terms of any kind of numerical conclusions here. It all depends on what we see out there in terms of the quality of the accretive M&A acquisitions where our share price maybe and are continued focus to de-lever. I would be hesitating to put any kind of priority and any of that because things change so quickly. We are just going to look at things as we do, real time and make decisions that are going to be the most accretive to shareholders.

Great. Jay, if you don't mind, you mentioned January was off to really good start. Obviously, we did have that Northeast storm in the third week of January I believe last year. If you look at the majority of the portfolio which wasn't impacted by that storm and comps are not necessarily disrupted by anything, would you be able to make the same comment, i.e. off to a really good start?

I might take out, really, I would say, we are off to a good start, when you take out that blizzard impact from 2016, Carlo. But I would have to say that one thing I am encouraged by in the fourth quarter and we're seeing it lead through into January again even when you factor out the weather is that, our rated business across the organization is really strong relative to where it was in previous quarters. We actually saw visitation growth and rated revenue growth in all of our segments including the lower segments which I think is encouraging. It’s a little too early to say that's a new trend, but that’s what we saw on the fourth quarter, we're seeing in January. The only softness really from our business is the unrated business in the couple of the markets, sorry few of the markets that I mentioned in my opening comments.

Thank you. Our next question comes from the line of Felicia Hendrix with Barclays. Please proceed.

Regarding your share repurchase, I think I know the answer to this given the timing of your quiet period in the quarter and all that, but I do have to ask if you have repurchased any shares yet?

No, we are currently in its quiet period and we have not made any announcements or discussions on the share re-purchase.

Okay thanks. BJ, on your guidance, EBITDA was a little lighter than we expected, and also relative to consensus, but revenues were higher. Can you talk about the puts and takes in there, and how come the flow through was a little bit lower than consensus? Also, there was a comment in he GLPI release that income from rental activities was impacted by about $0.5 million due to performance at Columbus and Toledo, so I was wondering if you could address that as well?

On the guidance, some of the flow through coming through, we had some changes on the pick on Jamul which was going from the pick to the current amounts that was out there. Some of the big changes just to make sure that we are clear talking about the 2015 to 2016 on the EBITDA, I was making sure that we had the recognition of the St. Lewis property tax that was in the fourth quarter of 2015 of 16.8 million.

No, I was talking about the implied flow through from your guidance.

And then than the other component on guidance going forward is also an addition to the change of the interest on Jamul, we had the Rocket contingency, that was going to be coming in as well and then also some modifications on the tax -- the book taxes.

Okay, but would the book taxes affect your EBITDA? Your revenues were higher than guidance, but the EBITDA was lower. I'm trying to understand.

And the other key component is that we're having the zero fees from Jamul, that were pulled out of our -- included in the EBITDA.

Wouldn't that affect revenues the same?

It would affect, but the -- it would affect the revenues, but the margins would be -- the flow through would be impacted by it, as we directed.

Okay.

Are you asking the question relative to your model?

No, let's forget about my model. Just relative to consensus, your revenues were above consensus, but your EBITDA was lower, so either the Street is just totally off on what flow through should be, or there's something happening between revenue and EBITDA that I'm just trying to understand. I understand that your fees are lower, but that should hit revenues and EBITDA relatively the same. I'm just trying to figure out if there's anything in there that we don't know about yet. Or that we need to understand more.

Felicia this is Jay, we still have to show some revenue recognition for Jamul based on the reimbursement of management, cost at the property that will show up regardless of what happened to the fees. So you really have a reduction in EBITDA, by virtue of not accounting for fees in 2017, but you do still have the revenue recognition for that portion of the Jamul management cost.

Okay. That's helpful. Just the comment from the GLPI release, regarding the --.

We haven’t seen a GLPI release, could you say what was in there again, regarding our operations.

It said income from rental activities had an unfavorable variance of $0.5 million due to performance at Penn National Gaming's Hollywood Casino Columbus and Hollywood Casino Toledo.

So Felicia in the fourth quarter, we continued to have some disruption by virtue of two things at Toledo specifically, which is, the road way constructions though it has paused, the construction elements are still on the road. So it reduced down to one lane for portions of I75 to the north, most of what was occurring to our south has been cleaned up, but there is still some one roadway noise in the Toledo numbers. And then secondarily, we had harsh weather in December, though January has been mild, the mid-west was hit hard year-over-year. Just looking at snow impacted days, for Toledo, this year we had 13 weather impacted days in December verses two last year, in Columbus we had six in December of 2016 versus zero in 2015. So it really was more weather impacted for the fourth quarter.

In fact Felicia, in Toledo we were required by the state to close our casino for a day because of bad weather and that really impacted a whole weekend in December for some of the revenue softness.

Okay, helpful. Finally, Jay can you help us understand the comment in your release regarding Jamul, based on current business levels, we expect a portion of or all of term loan C to be subordinated. I understand the parts of term loan C and how they're being subordinated, I'm wondering the connection between based on current business levels and the need or decision to subordinate some of that, or all of that.

Felicia, this is BJ. We have a onetime test of 365 days out of the year, after operations which basically is the beginning of October, next year -- this year, to where we will have to be to the extent that the -- if the leverage ratio is greater than five times. Everything above that five times will become subordinated. So based upon the actual operations at that time we'll make the determination of exactly what that -- a proportion or all of the loan will become subordinated.

But based on our current projections Felicia, that’s why we made the statement that there is, this should be the expectation that all or part of our loan will be subordinated.

Thank you. Our next question comes from the line of Steve Wieczynski with Stifel Nicolaus. Please proceed.

The first question would be around the drop, and your decision to wait until later in the year to get more color around the master plan. Should we assume in your mind, you give your stock at this point as a better investment right now, versus the potential returns you could get out of putting that money in the ground in Las Vegas?

Steve, I wouldn’t to come to that conclusion. I think we collectively as management feel that we want to see the impact of these new food and beverage improvements this year because most of the incremental $200 million that we talked about will be going toward approving non-gaming amenity at Tropicana in the long term. And since that’s where the majority of the capital is projected to be spent, we want to make sure we're seeing the results from the opening of the Robert Irvine restaurant and the other upgrades we're making into our food and beverage operations, and see the customer reaction and spend regarding these improvements. Before we commit long term to the $200 million program, I would make the conclusion that we think the return to shareholders in a share-repo is more attractive than the long-term prospects at Tropicana.

Steve the other thing that I would add to that with regards to Tropicana and the timing is that, the pedestrian sky bridge is as you may know, you may not, the one that connects us to Excalibur was under construction for the last few months of 2016. And the one that would connect to MGM is under construction and not able to be utilized for the first six months of 2017. So there is some customer visitation and pedestrian traffic patterns that are disrupted right now. And we have the new food and beverage offerings coming online midyear, the bridges will be completed midyear and so second half of the year I think will be a great opportunity for us to go and make the good determination as to what the changes in behavior both with regards to cross property visitation from our neighbors as well as data base performance looks like when the construction is behind us and the new offerings are online.

Steve, I would add to that the additional time also gives us time to further our design and really nail down some of the key issues and improvements that we've been seeing going on with the operations as well and incorporate those into the design, as well as make the design more efficient. So I think there is some benefit to it as well.

Second question, going back to guidance for 2017. Can you help us think about how you developed your guidance, more so thinking about how you thought about the consumer trends in general moving through 2017? I would assume that you aren't making any assumptions that consumer spending gets any materially better throughout the year due to the president trying to make America great again. I would also assume that your guidance does not incorporate any buybacks for the year.

You were correct. We are not assuming that the Trump Administration has any material impact on consumer behavior. We assume from a same store sales prospective, it's obviously a mix bag depending on the market, whether you mix it all together and there is some slight growth there from a same store perspective. And then we have some stronger results from any of our newer operations. Ohio still continues to ramp well, Missouri has been a great market for us. Las Vegas has been a great market for us. So those are sort of the puts and takes.

And Steve, you're absolutely correct again in that date, the guidance does not contemplate at this time, any other buybacks.

Thank you. Our next question comes from the line of Thomas Allen with Morgan Stanley. Please proceed.

You highlighted New Mexico continued to be weak. Have you started to see any signs of oil-driven markets starting to rebound?

Hey Thomas, I wouldn’t go as far as to say rebound. But I would say that in the month of December, which was important for us to see and we saw it again in January, we’re seeing that market stabilized, which I had not been able to say for a year. So I'm encouraged by at least seeing signs of stabilization and I'm cautiously optimistic that we may be able to see some growth in that market as we conclude 2017, if we see that the oil production activity in the area picks ups. At this point it hasn't picked up, but don’t see oil rigs and workers closing up shops like we were throughout 2016.

Helpful, thanks. Just related to the federal tax reform proposals that have been put out there, how are you thinking about them impacting our business both on a demand and fundamental side, as well as just thinking about accounting and income statement and cash flow impact? Thanks.

Thomas, right now there is obviously a lot of different proposals on tax reform, that’s been thrown out there. We've looked at it, we've certainly obviously hoped to see lower corporate tax rate, we think that will be beneficial, but I don’t want to provide any detailed commentary on it until we see more specifically what they're talking about.

And we were specific in the guidance saying, we don’t anticipate any changes and all of the numbers we’ve gathered are basically on a status quo what's there.

Okay. Great. Quickly on Tropicana, and on these pedestrian bridge construction, do you still expect Tropicana EBITDA to increase in 2017 despite that impact?

We do, I think there will be some impact in the first quarter, lessening in the second quarter and I anticipate a strong second half of the year, once the construction is behind us. And overall to your question, yes we anticipate growth in EBITDA at Tropicana in '17.

If you recall Thomas, last year we didn’t turn on marquise rewards channel till May 1st, so we have full year of that in 2017. With all the work we did on the casino floor to improve the product offerings, March and April last year were pretty disruptive to the customer experience. So we got that behind us as well.

Thank you. Our next question comes from the line of Joseph Greff with JPMorgan. Please proceed.

My first question relates to the no EBITDA contribution from Jamul in the 2017 guidance. Can you explain that? I know some of your economics is royalty top line driven and the balance of it is 30% of income. Are you basically telling us that the offset from the lack of EBIT is a wash with the royalty fees? And do you think of it first half is negative EBITDA contribution and the second half is positive EBITDA contribution, and the full year's net a wash?

Joe, its BJ. It's really a combination of the number of factors, and some of which are included in the docs which are public. But the bottom line is that it really does focus on the results from the operations. Your comments on EBIT is absolutely correct, it's very strong positive on the EBITDA side. EBIT is, obviously with the level of debt that's outstanding, definitely different. I think with respect we were being -- we took a look at the current volumes that were out there and projections going forward. It's really going to be dependent upon the business levels that we see coming up in the next five months. And that is -- as a result of that we've taken a look and basically identified the fact that we feel the best appropriate guidance is to not identify it. We are still having conversations with the tribe, we'll still be continuing to look to improve the overall operations, and to the extensive that things change, we will update that at that time.

Joe, this is Jay. This is a property that is generating meaningful EBITDA today and will continue to do so. It's just the EBIT characteristic that in large part causes us to assume no EBITDA contribution for PENN in 2017.

Great. Tim onto Tropicana, is it possible that the CapEx actually comes out to less than $200 million, or additional incremental investment there? And is it possible that some of that amount can be shared with a third party or a partner? Or is this just really a pushing out of investment that you're definitely going to do there?

I think BJ highlighted, this gives us time to continue to examine our masterplan program and look at all of those options. So I would say those things continue to be on the table. We don’t know where that $200 million number is going to go, it could go to third party, it could not. So we have now a couple of more quarters to really think this though and as I said before, to take a look at the effect of the new improvements we're making today at Tropicana, we may come online in the third quarter. I do want to reiterate, we are still very bullish on the long-term prospect in Las Vegas. We think the market characteristics there very solid for the next five years and we think Tropicana is going to continue to enjoy growth over that time period with the capital coming online and what additional capital comes online beyond 2017.

Then Jay, I just want to make sure I heard you correctly, earlier in your prepared comments when you discussed the Tropicana in the fourth quarter, that it did double digit EBITDA in millions, in the fourth quarter, absolute dollars versus double digit EBITDA growth, so it's somewhere 10 million or north of that. Did I hear that correctly?

That was not specific the fourth quarter. I was recapping for the year. We were double digit EBITDA to property versus, when we first started acquisition diligence on the asset. In early '15 it was just barely profitable.

Got it and then my last question here. What's the rent coverage -- implied rent coverage in '17?

Implied for '17 is -- well the current that has been up to date is 1.68. And so, the current after this one is 1.68.

If we look at 2017, what's implied, and maybe I can talk to you offline about it. Is it comparable, how do you think about the different pieces of guidance, and how that rent coverage?

It's comparable and we're not expecting the escalator to be occurring in 2017.

Thank you. Our next question comes from the line of Cameron McKnigh with Wells Fargo. Please proceed.

A question for Jay, first of all. Can you talk about what you are hearing from players and hosts at Charles Town, and what the impact of traffic in the DC area has been post the opening of National Harbor? And then I have a follow-up.

Sure Cameron, it's really been mixed off course, I would say generally positive from our prospective in the sense that many of our customers particularly those that are a little older, view that drive into through the Beltway and through national harbor as challenging during most of the days and most hours as any of you that have frequented national harbor know very well. We obviously also benefit by virtue of smoking been, something that we can offer on our gaming floor. In West Virginia, we have comp drinks as an option for our better players and really you hear a lot of customers just talking about, ease of access to easy of parking, whether valet or self-park at Charles Town versus national harbor. So again, early feedback has been mostly positive. Now again I would also tell you that I've been there and we hear our customer say it's gorgeous, it’s a beautiful Las Vegas like destination and those that are looking for that experience have that offering to consider, but there are many of our customers, like I said particularly when you're talking, 60-65 plus in age, that just really value the convenience faster and the service levels, we've got long standing relationships with these customers, nearly 20 years and we feel good about that.

Thanks. Then a question for BJ or Justin just following up on Joe's earlier question. What was final rental coverage for the 2016 lease year? It must've been higher than 1.68 for the escalator to have applied.

1.82.

1.82. And is 1.68 what you're assuming you will close out the 2017 lease year at in your full-year guidance?

No, it will be slightly higher, but we still will not hit the escalator.

Okay, slightly higher than 1.68 but obviously below 1.8.

Yes, that’s correct, that's a fair assumption.

Perfect. You noted in the release that you did a couple of tuck-in acquisitions with Prairie State Gaming. Are you able to give us some color in terms of multiple or size of those deals?

The multiple is something that we have not provided in the past. I think it's fair to say that they were accretive transactions. The size was approximately $1.5 million of EBITDA.

Thank you. Our next question comes from the line of Chad Beynon with Macquarie. Please proceed.

Eric, one for you on the legislative front. It looks like Georgia and Florida are the two states with bills that have come out so far in 2017, in addition to Pennsylvania. Could you just update us in terms of how you're thinking about those markets? I know in Florida in particular, what would be the model where there could potentially be an expansion of gaming at current racetracks. I know historically that was one of the ways in which you got into the market and ended up generating a nice return. Could you just update on those markets? And then from a bigger standpoint, just views on Japan, if that's something that you would dedicate any time or money to as this plays out? Thanks.

Sure when I start with the Florida, Florida obviously flaunts that the racetracks is back on the table. It's entangled in the broader debate over the compact. And so some of this is going to have to do with the diplomacy between the tribe and the state trying to come up with the new deal. We look at it from the perspective of, if flat tracks gets approved and its subject to local vote, how would we fair in our local community and right now we're still trying to chip away at what is a pretty conservative voter base there. And so our local county and our city have been opposed and we've been spending a lot of time trying to educate them on the benefit from an economic development perspective, from the new revenue perspective, just to position ourselves to be able to capitalize on the opportunity if it comes to pass. But that’s really where our focus has been locally versus at the state-wide level. Moving to Georgia the proposals there have gone from six licenses across the state to now a new agreement that appears to have the backing of the governor that would be for two licenses, a $2 billion opportunity in Atlanta and $450 million investment level in either Columbus, Savannah or Augusta. I think we have said on previous calls that we have been spending a lot of time in Savannah and looking at relationships, building relationships and looking at land opportunities and other markets as well. So we are -- we spent some time there last week, meeting with legislators. We are hopeful that we can get to a legislative proposal that makes sense right now. There are some challenges with the current legislation including right now 60% to 65% of revenues have to come from non-gaming. We think that’s little high, we think that $450 million spent should be really left up to the market place to decide. So we're working with legislators to try to shake that legislation as it goes through this session and maybe even next session with the hope of getting them on the ballot in 2018. Finally, in Pennsylvania, I spent some time yesterday in Harrisburg, to say the situation there is fluid would be an understatement. The commonwealth is looking at close to a $3 billion deficit and all new revenue options are on table. And so we're trying to look at it both in terms of defending our existing investment and the 2,300 jobs that we have at our Hollywood casino. As well as look at it opportunistically to see whether we can get gaming out of this and frankly there has been a lot of discussion around VGT's and so we've been working potential model that would work for us, protect our investment and allow some upside. Japan is, Tim we want to handle Japan?

Let me just, Chad. We certainly are watching Japan with the legislation to authorize integrated resorts. There is still a lot more legislative work that has to happen to really define the opportunities for us. BJ and I have been over to Japan, over last couple of years, establishing relationships and understanding the opportunities there. But it's still a long way off, that said it's something long term that we certainly have to watch, as a potential growth vehicle for us.

Okay, thank you very much. Follow-up, switching gears. BJ, within the press release and your financial guidance, you talked about income tax refunds of $41 million. That looks like it's going to be spread over the course of the year, based on the guidance for the first quarter. Anything that could happen that would really dramatically change that number, or do you view that as a pretty solid number as we think about cash flow puts and takes?

No, that’s a pretty solid number and it's a result of multiple years of review and past year. So we feel comfortable in that number.

Thank you. [Operator Instructions] Our next question comes from the line of David Hargreaves, Stifel Nicolaus. Please proceed.

In traveling around Kansas City and Charles Town we've noticed that you have been featuring Tropicana a lot. When we look at your spend in Ohio, I'm wondering how much the increase in spend we see is driven by, you mentioned disruption and weather versus how much is going after the opportunity now that Caesars is no longer in that market? Are you getting some of those customers? Wondering how that is going.

This is Jay, our increase and spend that you're referencing that’s public is with regards to promo credits, that’s not any incremental spend with regards to marketing Tropicana or Las Vegas in general. We do market and advertise for Tropicana and M Resort across all of our properties. And our approach is no different in the state of Ohio, the increase in promo credits is primarily at our Toledo property, when you’re looking year-over-year is that we found that in some of the fight zones, between us and Detroit, there was an opportunity to be a little bit aggressive. So we're getting a nice return on that spend, whereas the customers closer to the property, the reinvestment levels are really unchanged on a year-over-year basis.

We should consider that ongoing, it's probably not going to abate anytime soon?

That is correct. Again, we're getting a return on that spend. So I would not anticipate that changing materially in 2017.

Everything else is asked, thank you.

Thank you. Our next question comes from the line of John DeCree with Union Gaming Group. Please proceed.

I think mostly everything has been asked, but I just wanted to follow-up on a target leverage level where you feel comfortable. Obviously meaningful progress last year in deleveraging the balance sheet. You mentioned that's still focus of yours, just wondering what your comp target range might be?

I think that we are pretty much consistent in saying that our near-term target is between 5.5 and 5 on a total leverage basis. And we say there-in we'll continue to try to de-lever to get down to that level.

Great. Thank you. Lastly, to the extent you have any color as it relates to Charles Town and the market there, it's only been about two months. I'm wondering if you have any insight on how the market has responded overall, as it relates to the promotional environment, to ramping up marketing with new supply in that market?

John as you mentioned it's been a little bit less than two months, so it's still, as I said earlier, it's the early innings in that market place. MGM is building their database. Maryland Live is focused very much right now on non-gaming development to couple of hotels. And we are focused on continuing to enhance the relationships with our best players. So I think we'll have more color on that specific question as I see what reaction there maybe throughout the first quarter, when we get that together in late April.

And there are no further questions at this time. Mr. Wilmott I would like to turn the call back to yourself for any concluding statements.

Thank you, operator. Thanks for your attention on this call, this morning I hope all this information leaves you with really three things to come away with from PENN. First, we continue to deliver results even in tough revenue environment and the operating folks that run our businesses continue to do a very good job generating the profits in these markets. We also have a continuing and emerging earnings story that will continue to diversify and grow and we're going to look forward to continued improvement in our interactive ventures business and also to continue to be a consolidator in the slot route operation business over the next couple of years. And then finally, we have expectations for 2017 to deliver strong cash flow from our operations which gives us the flexibility to de-lever, return capital to shareholders and continue to purse accretive M&A opportunities during the course of this year and moving forward. So with that thank you for your attention this morning and we look forward to getting back with you in April.

Ladies and gentlemen that does conclude the conference call. We thank you for your participation and ask you to please disconnect your line.